Syria’s economy is key to Assad’s future

BEIRUT — The dramatic decision by Arab states to turn against President Bashar al-Assad could further damage Syria’s economy at a time when it is already unraveling, posing perhaps a graver challenge to Assad’s survival than the country’s nearly-eight-month-old popular uprising, analysts say.

The broader loss of regional support represents an important psychological blow to a regime that has long prided itself as a champion of Arab nationalist causes. In one indicator of how far Assad’s fortunes have fallen, Jordan’s King Abdullah II suggested Monday that the Syrian president step down, though he hedged that call, telling the BBC that Assad needed to ensure an orderly transition.

It was, nonetheless, the most explicit rejection yet by an Arab leader of Assad’s rule ahead of an Arab League meeting Wednesday to discuss further measures against Syria, including economic sanctions.

They could have a more profound and immediate effect than the withdrawal of political support, given that Western powers are ruling out military intervention and anti-government demonstrations have seen neither the protest movement nor the Syrian security forces gain a decisive advantage. On Monday, the European Union announced that it would expand its sanctions, to include 18 more individuals associated with the Assad regime and denial of access to the European Investment Bank.

“The economy is a trigger of a lot of other issues on a broader level,” said Ayham Kamel, Middle East analyst with the Eurasia Group. The business community has supported Assad so far, he said, “but over a longer period of time, they’re going to reevaluate.”

The extent of the damage is difficult to measure, and Syrian government officials say they don’t have indicators. But they do not play down the gravity of the situation.

Syrian Economy Minister Mohammad Nidal al-Shaar said at a conference last month that the economy is in a “state of emergency,” according to comments quoted by the Damascus-based Syria Report. In a recent interview in Damascus, Adib Mayalah, governor of the Central Bank of Syria, described the situation as “very serious” and ticked off the problems the economy is facing.

“Unemployment is rising, imports are falling, and government income is reduced,” he said. “In areas where there are protests, there is no economic activity — so people aren’t paying tax. Because they aren’t working, they are not repaying their loans — so the banks are in difficulty. And all this is weakening the economy.”

Merchants interviewed recently on the streets of Damascus report a 40 to 50 percent fall in business as consumers hoard cash and cease spending on all but the most essential items. Tourism has skidded to a halt, representing a loss of $2 billion a month to an economy worth $59 billion last year, Mayalah said.

“The whole system has been shrinking — and very fast,” said Rateb Shallah, a prominent Damascus businessman. “The sanctions are squeezing us, and it is definitely affecting us quite a bit.

To what extent the downturn is due to the sanctions isn’t clear, however.

Until now, only the United States, the European Union, Canada and Japan have imposed sanctions on Syria, with relatively limited measures mostly targeting individuals and financial services. The most serious measure, a European embargo on oil purchases imposed in August, goes into effect only on Tuesday because Italy sought to ensure that its existing contracts were honored.

But the experience of the oil embargo illustrates the broader crisis of confidence confronting Syria. European nations, which account for a vast majority of Syrian oil exports, immediately halted their purchases, even though they were not required to do so for three more months. And oil pumped since then has gone unsold, despite Syria’s boasts that it would easily find other customers. Syria has curtailed its oil production by more than 25 percent, Mayalah said.

In a similar fashion, the restrictions on financial services and individuals have had a detrimental effect even on aspects of the economy that aren’t directly connected, by dissuading investors and companies from doing business with Syria. The Central Bank of Syria has not been sanctioned, but many businesses are refusing to engage with it because they fear falling foul of the U.S. prohibition on trade in services with Syria and jeopardizing their interests elsewhere, Mayalah said.

Foreign investment has slowed to a trickle for the same reasons, he said, even though there are no restrictions.

But investors may be equally deterred by Syria’s shaky political future and the escalating violence. The Local Coordination Committees, an opposition group, reported the deaths of 50 people in violence Monday, 28 of them in the southern province of Daraa, where there were unconfirmed reports of major clashes between the Syrian army and defected soldiers. The official Syrian Arab News Agency said two members of the security forces were killed in Daraa.

A trade embargo would be difficult to enforce. Syria can still count on two key neighbors with which it shares long and porous borders: Lebanon, one of only two countries that voted against the Arab League’s resolutions censuring Syria, and Iraq, which abstained.

Yet even trade with Iraq, which has been seeking to boost business ties with Syria as the region tilts against it, has fallen because of the indirect effect of sanctions, said Syria’s deputy economy minister, Khaled Mahmoud Saloutah. The two trading companies that handle most cross-border trade are based in Europe and have been forced to curtail their transactions, reducing the value of Syria’s exports to Iraq by 10 percent, he said.

“The economy is not going to collapse overnight,” Kamel said. “But it is definitely taking Syria down a risky path.”